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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 

FORM 10-Q

(Mark One) 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____________ to __________
Commission File Number: 001-34112
erilogoh4c.jpg
Energy Recovery, Inc.
(Exact Name of Registrant as Specified in its Charter)
 
Delaware
 
01-0616867
 
 
(State or Other Jurisdiction of Incorporation)
 
(I.R.S. Employer Identification No.)
 

1717 Doolittle Drive, San Leandro, California 94577
(Address of Principal Executive Offices) (Zip Code)

(510483-7370
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common
 
ERII
 
The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes  No 
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer      Accelerated filer      Non-accelerated filer      Smaller reporting company      Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes  No þ
As of April 24, 2020, there were 55,546,399 shares of the registrant’s common stock outstanding.
 



ENERGY RECOVERY, INC.
TABLE OF CONTENTS

 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 


 
 
 
Energy Recovery, Inc. | Q1'2020 Form 10-Q | 2


PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements (unaudited)
ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
March 31,
2020
 
December 31,
2019
 
(In thousands, except share data and par value)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
32,842

 
$
26,387

Short-term investments
40,995

 
58,736

Accounts receivable, net
13,841

 
12,979

Inventories, net
10,938

 
10,317

Prepaid expenses and other current assets
5,187

 
4,548

Total current assets
103,803

 
112,967

Long-term investments
19,361

 
15,419

Deferred tax assets, non-current
16,932

 
16,897

Property and equipment, net
19,780

 
18,843

Operating lease, right of use asset
17,253

 
11,195

Goodwill
12,790

 
12,790

Other intangible assets, net
61

 
65

Other assets, non-current
632

 
598

Total assets
$
190,612

 
$
188,774

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,868

 
$
1,192

Accrued expenses and other current liabilities
6,156

 
9,869

Lease liabilities
1,209

 
1,023

Contract liabilities
16,509

 
15,746

Total current liabilities
25,742

 
27,830

Lease liabilities, non-current
17,523

 
11,533

Contract liabilities, non-current
8,805

 
13,120

Other non-current liabilities
277

 
278

Total liabilities
52,347

 
52,761

Commitments and contingencies (Note 8)

 

Stockholders’ equity:
 
 
 
Common stock
61

 
61

Additional paid-in capital
171,954

 
170,028

Accumulated other comprehensive loss
(332
)
 
(37
)
Treasury stock
(30,486
)
 
(30,486
)
Accumulated deficit
(2,932
)
 
(3,553
)
Total stockholders’ equity
138,265

 
136,013

Total liabilities and stockholders’ equity
$
190,612

 
$
188,774


See Accompanying Notes to Condensed Consolidated Financial Statements

 
 
 
Energy Recovery, Inc. | Q1'2020 Form 10-Q | 3


ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three Months Ended March 31,
 
2020
 
2019
 
(In thousands, except per share data)
Product revenue
$
19,001

 
$
16,072

Product cost of revenue
5,684

 
4,935

Product gross profit
13,317

 
11,137

 
 
 
 
License and development revenue
2,543

 
3,723

 
 
 
 
Operating expenses:
 
 
 
General and administrative
6,881

 
5,579

Sales and marketing
2,138

 
2,162

Research and development
6,709

 
4,254

Amortization of intangible assets
4

 
156

Total operating expenses
15,732

 
12,151

Income from operations
128

 
2,709

 
 
 
 
Other income (expense):
 
 
 
Interest income
420

 
523

Other non-operating expense, net
(12
)
 
(24
)
Total other income, net
408

 
499

Income before income taxes
536

 
3,208

(Benefit from) provision for income taxes
(85
)
 
554

Net income
$
621

 
$
2,654

 
 
 
 
Earnings per share:
 
 
 
Basic
$
0.01

 
$
0.05

Diluted
$
0.01

 
$
0.05

 
 
 
 
Number of shares used in per share calculations:
 
 
 
Basic
55,412

 
54,116

Diluted
56,542

 
55,368


See Accompanying Notes to Condensed Consolidated Financial Statements



 
 
 
Energy Recovery, Inc. | Q1'2020 Form 10-Q | 4


ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended March 31,
 
2020
 
2019
 
(In thousands)
Net income
$
621

 
$
2,654

Other comprehensive (loss) income, net of tax
 
 
 
Foreign currency translation adjustments
(25
)
 
(24
)
Unrealized (loss) gain on investments
(270
)
 
84

Other comprehensive (loss) income, net of tax
(295
)
 
60

Comprehensive income
$
326

 
$
2,714


See Accompanying Notes to Condensed Consolidated Financial Statements



 
 
 
Energy Recovery, Inc. | Q1'2020 Form 10-Q | 5


ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended March 31,
 
2020
 
2019
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
621

 
$
2,654

Adjustments to reconcile net income to cash used in operating activities
 
 
 
Stock-based compensation
1,503

 
1,678

Depreciation and amortization
1,258

 
900

Amortization (accretion) of premiums and discounts on investments
220

 
(26
)
Deferred income taxes
(35
)
 
549

Provision for warranty claims
98

 
152

Other non-cash adjustments
47

 
(68
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(902
)
 
(7,162
)
Contract assets
(244
)
 
2,977

Inventories, net
(692
)
 
(218
)
Prepaid and other assets
(428
)
 
(140
)
Accounts payable
745

 
18

Accrued expenses and other liabilities
(4,514
)
 
(3,353
)
Income taxes
3

 
10

Contract liabilities
(3,552
)
 
(3,922
)
Net cash used in operating activities
(5,872
)
 
(5,951
)
Cash flows from investing activities:
 
 
 
Sales of marketable securities
4,974

 

Maturities of marketable securities
21,195

 
19,599

Purchases of marketable securities
(12,855
)
 
(19,198
)
Capital expenditures
(1,380
)
 
(1,566
)
Net cash provided by (used in) investing activities
11,934

 
(1,165
)
Cash flows from financing activities:
 
 
 
Net proceeds from issuance of common stock
440

 
2,191

Tax payment for employee shares withheld
(22
)
 
(34
)
Net cash provided by financing activities
418

 
2,157

Effect of exchange rate differences on cash and cash equivalents
(25
)
 
(4
)
Net change in cash, cash equivalents and restricted cash
6,455

 
(4,963
)
Cash, cash equivalents and restricted cash, beginning of year
26,488

 
22,138

Cash, cash equivalents and restricted cash, end of period
$
32,943

 
$
17,175


See Accompanying Notes to Condensed Consolidated Financial Statements

 
 
 
Energy Recovery, Inc. | Q1'2020 Form 10-Q | 6


ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
Three Months Ended March 31,
 
2020
 
2019
 
(In thousands)
Common stock
 
 
 
Beginning balance
$
61

 
$
59

Issuance of common stock, net

 
1

Ending balance
61

 
60

 
 
 
 
Additional paid-in capital
 
 
 
Beginning balance
170,028

 
158,404

Issuance of common stock, net
418

 
2,156

Stock-based compensation
1,508

 
1,671

Ending balance
171,954

 
162,231

 
 
 
 
Accumulated other comprehensive loss
 
 
 
Beginning balance
(37
)
 
(133
)
Other comprehensive (loss) income
 
 
 
Foreign currency translation adjustments
(25
)
 
(24
)
Unrealized (loss) gain on investments
(270
)
 
84

Total other comprehensive (loss) income, net
(295
)
 
60

Ending balance
(332
)
 
(73
)
 
 
 
 
Treasury stock
 
 
 
Beginning and ending balance
(30,486
)
 
(30,486
)
 
 
 
 
Accumulated deficit
 
 
 
Beginning balance
(3,553
)
 
(14,466
)
Net income
621

 
2,654

Ending balance
(2,932
)
 
(11,812
)
 
 
 
 
Total stockholders’ equity
$
138,265

 
$
119,920

 
 
 
 
Common stock issued (number of shares)
 
 
 
Beginning balance
60,718

 
59,396

Issuance of common stock, net
281

 
523

Ending balance
60,999

 
59,919

 
 
 
 
Treasury stock (number of shares)
 
 
 
Beginning and ending balance
5,456

 
5,456




See Accompanying Notes to Condensed Consolidated Financial Statements

 
 
 
Energy Recovery, Inc. | Q1'2020 Form 10-Q | 7


ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1Description of Business and Significant Accounting Policies

Energy Recovery, Inc. and its wholly-owned subsidiaries (the “Company” or “Energy Recovery”) has, for more than 20 years, created technologies that solve complex challenges for industrial fluid flow markets worldwide. The Company designs and manufactures solutions that reduce waste, improve operational efficiency, and lower the production costs of clean water and oil & gas. The Company’s solutions are marketed and sold in fluid flow markets such as water, oil & gas and chemical processing under the trademarks ERI®, PX®, Pressure Exchanger®, PX Pressure Exchanger®, VorTeq, MTeq, IsoBoost®, IsoGen®, AT and AquaBold. The Company owns, manufactures and/or develops its solutions, in whole or in part, in the United States of America (“U.S.”).

Basis of Presentation

The Company’s Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

The accompanying Condensed Consolidated Financial Statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The December 31, 2019 Condensed Consolidated Balance Sheet was derived from audited financial statements and may not include all disclosures required by GAAP; however, the Company believes that the disclosures are adequate to make the information presented not misleading.

The March 31, 2020 unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto for the fiscal year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 6, 2020 (“2019 Annual Report”).

In the opinion of management, all adjustments consisting of normal recurring adjustments that are necessary to present fairly the financial position, results of operations and cash flows for the interim periods have been made. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods.

Use of Estimates

The preparation of Condensed Consolidated Financial Statements, in conformity with U.S. GAAP, requires the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes.

The accounting policies that reflect the Company’s more significant estimates and judgments and that the Company believes are the most critical to aid in fully understanding and evaluating its reported financial results are revenue recognition; capitalization of research and development (“R&D”) assets; allowance for doubtful accounts; allowance for product warranty; valuation of stock options; valuation and impairment of goodwill and acquired intangible assets; valuation adjustments for excess and obsolete inventory; deferred taxes and valuation allowances on deferred tax assets; and evaluation and measurement of contingencies. Those estimates could change, and as a result, actual results could differ materially from those estimates.

Due to the novel coronavirus (“COVID-19”) pandemic, the reduced demand of oil and gas, as well as the oversupply of oil, there has been uncertainty and disruption in the global economy and financial markets. The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of May 1, 2020, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions. The Company undertakes no obligation to update publicly these estimates for any reason after the date of this Quarterly Report on Form 10-Q, except as required by law.


 
 
 
Energy Recovery, Inc. | Q1'2020 Form 10-Q | 8


ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Significant Accounting Policies

Except for adopting new accounting pronouncements, as noted under “Recently Adopted Accounting Pronouncements,” there have been no material changes to the Company’s significant accounting policies in Note 1, “Description of Business and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements included in the 2019 Annual Report.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which amends Accounting Standards Codification (“ASC”) 326, Financial Instruments-Credit Losses (“ASC 326”). Subsequent to the issuance of ASU 2016-13, ASC 326 was amended by various updates that amend and clarify the impact and implementation of the aforementioned update. The new guidance introduces the current expected credit loss (“CECL”) model, which will require an entity to record an allowance for credit losses for certain financial instruments and financial assets, including trade receivables, based on expected losses rather than incurred losses. Under this update, on initial recognition and at each reporting period, an entity will be required to recognize an allowance that reflects the entity’s current estimate of credit losses expected to be incurred over the life of the financial instrument. In February 2020, the FASB issued ASU No. 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842)-Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2020-02”), which amends the language in Subtopic 326-20 and addresses questions primarily regarding documentation and company policies. ASU 2016-13 and its amendments are effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2019, on a modified retrospective basis. The adoption of ASU 2016-13 and its amendments on January 1, 2020 did not have a material impact on the Company’s Condensed Consolidated Financial Statements and related disclosures. The Company will continue to actively monitor the impact of the recent COVID-19 pandemic, the reduced demand of oil and gas, as well as the oversupply of oil, on expected credit losses.

In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments (“ASU 2020-03”). This ASU improves and clarifies various financial instruments topics, including the CECL standard issued in 2016. ASU 2020-03 includes seven different issues that describe the areas of improvement and the related amendments to GAAP, intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. The amendments have different effective dates. The adoption of ASU 2020-03 on January 1, 2020 did not have a material impact on the Company’s Condensed Consolidated Financial Statements and related disclosures.

Recently Issued Accounting Pronouncements Not Yet Adopted

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. Entities may apply the provisions of the new standard as of the beginning of the reporting period when the election is made (i.e., as early as the first quarter 2020). Unlike other topics, the provisions of this update are only available until December 31, 2022, when the reference rate replacement activity is expected to have completed. The Company is currently evaluating the impact of the provisions of ASU 2020-04 on its financial condition, results of operation, and cash flows.


 
 
 
Energy Recovery, Inc. | Q1'2020 Form 10-Q | 9


ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 2Revenue

 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
 
Water
 
Oil & Gas
 
Total
 
Water
 
Oil & Gas
 
Total
 
(In thousands)
Primary geographical market
 
 
 
 
 
 
 
 
 
 
 
Middle East and Africa
$
16,231

 
$

 
$
16,231

 
$
8,698

 
$
104

 
$
8,802

Americas
1,201

 
2,543

 
3,744

 
4,023

 
3,723

 
7,746

Europe
794

 

 
794

 
1,113

 

 
1,113

Asia
775

 

 
775

 
2,134

 

 
2,134

Total revenue
$
19,001

 
$
2,543

 
$
21,544

 
$
15,968

 
$
3,827

 
$
19,795

 
 
 
 
 
 
 
 
 
 
 
 
Major product/service line
 
 
 
 
 
 
 
 
 
 
 
PX Pressure Exchangers, pumps and turbo devices
$
19,001

 
$

 
$
19,001

 
$
15,968

 
$
104

 
$
16,072

License and development

 
2,543

 
2,543

 

 
3,723

 
3,723

Total revenue
$
19,001

 
$
2,543

 
$
21,544

 
$
15,968

 
$
3,827

 
$
19,795



Contract Balances

The following table presents contract balances by category.
 
March 31,
2020
 
December 31,
2019
 
(In thousands)
Accounts receivable, net
$
13,841

 
$
12,979

Contract assets:
 
 
 
Contract assets, current (included in prepaid expenses and other current assets)
$
936

 
$
501

Contract assets, non-current (included in other assets, non-current)

 
191

Total contract assets
$
936

 
$
692

 
 
 
 
Current contract liabilities:
 
 
 
Customer deposits
$
536

 
$
1,506

Deferred revenue:
 
 
 
License and development
15,636

 
13,846

Product
78

 
78

Service
259

 
316

Total deferred revenue
15,973

 
14,240

Total current contract liability
16,509

 
15,746

Non-current contract liabilities, deferred revenue
 
 
 
License and development
8,717

 
13,048

Product
88

 
72

Total non-current contract liability
8,805

 
13,120

Total contract liability
$
25,314

 
$
28,866



 
 
 
Energy Recovery, Inc. | Q1'2020 Form 10-Q | 10


ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company records unbilled receivables as contract assets. The following table presents significant changes in contract assets during the period.
 
March 31,
2020
 
December 31,
2019
 
(In thousands)
Contract assets balance, beginning of year
$
692

 
$
4,083

Transferred to trade receivables
(5,579
)
 
(13,155
)
Additions to contract assets
5,823

 
9,764

Contract assets balance, end of period
$
936

 
$
692


The Company records contract liabilities when cash payments are received in advance of the Company’s performance. The following table presents significant changes in contract liabilities during the period.
 
March 31,
2020
 
December 31,
2019
 
(In thousands)
Contract liabilities balance, beginning of year
$
28,866

 
$
42,809

Revenue recognized
(3,980
)
 
(15,247
)
Increase due to cash received, excluding amounts recognized as revenue during the period
428

 
1,304

Contract liabilities balance, end of period
$
25,314

 
$
28,866



Transaction Price Allocated to the Remaining Performance Obligation

The following table presents the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied.
 
March 31,
2020
 
(In thousands)
Year:
 
2020 (remaining nine months)
$
26,185

2021
17,931

2022
661

2023
646

2024 and thereafter
4,385

Total performance obligation
$
49,808



Note 3Earnings per Share

Net income for the reported period is divided by the weighted average number of common shares outstanding during the reported period to calculate basic earnings per common share. Basic earnings per share exclude any dilutive effect of stock options and restricted stock units (“RSU”).

Diluted earnings per common share reflects the potential dilution that would occur if outstanding stock options to purchase common stock were exercised for shares of common stock (using the treasury stock method) and the shares of common stock underlying each outstanding RSU were issued (collectively referred to as “stock awards”). Certain shares of common stock issuable under stock options and RSUs have been omitted from the diluted earnings per share calculations because their inclusion is considered anti-dilutive.


 
 
 
Energy Recovery, Inc. | Q1'2020 Form 10-Q | 11


ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the computation of basic and diluted earnings per share.
 
Three Months Ended March 31,
 
2020
 
2019
 
(In thousands, except per share amounts)
Numerator:
 
 
 
Net income
$
621

 
$
2,654

 
 
 
 
Denominator (weighted average shares):
 
 
 
Basic common shares outstanding
55,412

 
54,116

Dilutive stock awards
1,130

 
1,252

Diluted common shares outstanding
56,542

 
55,368

 
 
 
 
Earnings per share:
 
 
 
Basic
$
0.01

 
$
0.05

Diluted
$
0.01

 
$
0.05



The following table presents the potential common shares issuable under stock awards that were excluded from the computation of diluted earnings per share, as their effect would have been anti-dilutive.
 
Three Months Ended March 31,
 
2020
 
2019
 
(In thousands)
Anti-dilutive stock awards
2,495

 
2,461



Note 4Other Financial Information

Cash, Cash Equivalents and Restricted Cash

The Company’s Condensed Consolidated Statement of Cash Flows explains the change in the total of cash, cash equivalents and restricted cash. The following table presents a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets that sum to the total of such amounts presented.
 
March 31,
2020
 
December 31,
2019
 
(In thousands)
Cash and cash equivalents
$
32,842

 
$
26,387

Restricted cash, non-current (included in other assets, non-current)
101

 
101

Total cash, cash equivalents and restricted cash
$
32,943

 
$
26,488



The Company pledged cash in connection with certain stand-by letters of credit and Company credit cards. The Company deposited corresponding amounts into restricted accounts at several financial institutions.

Accounts Receivable, net
 
March 31,
2020
 
December 31,
2019
 
(In thousands)
Accounts receivable, gross
$
14,189

 
$
13,287

Allowance for doubtful accounts
(348
)
 
(308
)
Accounts receivable, net
$
13,841

 
$
12,979




 
 
 
Energy Recovery, Inc. | Q1'2020 Form 10-Q | 12


ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Inventories
 
March 31,
2020
 
December 31,
2019
 
(In thousands)
Raw materials
$
4,947

 
$
3,742

Work in process
2,230

 
2,141

Finished goods
3,761

 
4,434

Inventories, net
$
10,938

 
$
10,317



Inventories are stated at the lower of cost or net realizable value (using the first-in, first-out method). Valuation adjustments for excess and obsolete inventory reflected as a reduction of inventory was $0.4 million at March 31, 2020 and December 31, 2019. During the three months ended March 31, 2020, due to the COVID-19 pandemic, the Company expensed $0.5 million to product cost of revenue related to the reduced utilization of its manufacturing facility due to the Company’s decision to temporarily suspend its manufacturing activities in light of measures adopted by state and local authorities to contain the spread of COVID-19. Subsequent to the quarter ended March 31, 2020, the Company has commenced limited manufacturing at its two facilities in accordance with federal, state and local regulations and guidance.

Accrued Expenses and Other Current Liabilities
 
March 31,
2020
 
December 31,
2019
 
(In thousands)
Payroll, incentives and commissions payable
$
3,538

 
$
6,040

Accrued warranty reserve
665

 
631

Other accrued expenses and current liabilities
1,953

 
3,198

Total accrued expenses and other current liabilities
$
6,156

 
$
9,869



Note 5Investments and Fair Value Measurements

The following table presents the Company’s cash equivalents and marketable securities in the form of short-term investments and long-term investments.
 
March 31,
2020
 
December 31,
2019
 
(In thousands)
Cash equivalents
$
20,638

 
$
11,668

Short-term investments
40,995

 
58,736

Long-term investments
19,361

 
15,419

Total cash equivalents and marketable securities
$
80,994

 
$
85,823



As of March 31, 2020 and December 31, 2019, there were no available-for-sale investments reported in cash equivalents.

Available-for-Sale Investments

The Company’s short-term and long-term investments are all classified as available-for-sale. As of March 31, 2020 and December 31, 2019, all available-for-sale investments were either classified as short-term with maturities less than 12 months or long-term with maturities over 12 months.


 
 
 
Energy Recovery, Inc. | Q1'2020 Form 10-Q | 13


ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company generally holds available-for-sale investments until maturity; however, from time-to-time, the Company may elect to sell certain available-for-sale investments prior to maturity. The following table presents the sales of available-for-sale investments.
 
Three Months Ended March 31,
 
2020
 
2019
 
(In thousands)
Corporate notes and bonds
$
4,974

 
$



The following tables present available-for-sale investments and their related gross unrealized holding gains and losses as of March 31, 2020 and December 31, 2019.
 
March 31, 2020
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Short-term investments
 
 
 
 
 
 
 
U.S. treasury securities
$
3,558

 
$
33

 
$

 
$
3,591

Corporate notes and bonds
37,540

 
5

 
(141
)
 
37,404

Total short-term investments
41,098

 
38

 
(141
)
 
40,995

Long-term investments
 
 
 
 
 
 
 
U.S. treasury securities
809

 
13

 

 
822

Corporate notes and bonds
18,751

 
11

 
(223
)
 
18,539

Total long-term investments
19,560

 
24

 
(223
)
 
19,361

Total available-for-sale investments
$
60,658

 
$
62

 
$
(364
)
 
$
60,356

 
December 31, 2019
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Short-term investments
 
 
 
 
 
 
 
U.S. treasury securities
$
2,746

 
$
1

 
$

 
$
2,747

Corporate notes and bonds
55,951

 
49

 
(11
)
 
55,989

Total short-term investments
58,697

 
50

 
(11
)
 
58,736

Long-term investments
 
 
 
 
 
 
 
Corporate notes and bonds
15,415

 
9

 
(5
)
 
15,419

Total long-term investments
15,415

 
9

 
(5
)
 
15,419

Total available-for-sale investments
$
74,112

 
$
59

 
$
(16
)
 
$
74,155



The Company monitors investments for impairment. It was determined that unrealized gains and losses at March 31, 2020 and December 31, 2019, are temporary in nature, because the changes in market value for these securities resulted from fluctuating interest rates, rather than a deterioration of the credit worthiness of the issuers. The Company is unlikely to experience gains or losses if these securities are held to maturity. In the event that the Company disposes of these securities before maturity, it is expected that the realized gains or losses, if any, will be immaterial.


 
 
 
Energy Recovery, Inc. | Q1'2020 Form 10-Q | 14


ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Expected maturities can differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties. The following table presents the amortized cost and the related fair value of short- and long-term available-for-sale securities with stated maturities shown by contractual maturity.
 
March 31, 2020
 
Amortized
Cost
 
Fair
Value
 
(In thousands)
Due in one year or less
$
41,098

 
$
40,995

Due in greater than one year
19,560

 
19,361

Total
$
60,658

 
$
60,356



Fair Value of Financial Instruments

All of the Company’s financial assets and liabilities are remeasured and reported at fair value at each reporting period; and are classified and disclosed in one of the following three levels:

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 — Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and
Level 3 — Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions that market participants would use in pricing.

The following tables present the fair value of financial assets measured on a recurring basis. As of March 31, 2020 and December 31, 2019, the Company had no financial liabilities.
 
March 31, 2020
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Cash equivalents
 
 
 
 
 
 
 
Money market securities
$
20,638

 
$
20,638

 
$

 
$

Total cash equivalents
20,638

 
20,638

 

 

Short-term investments
 
 
 
 
 
 
 
U.S. treasury securities
3,591

 

 
3,591

 

Corporate notes and bonds
37,404

 

 
37,404

 

Total short-term investments
40,995

 

 
40,995

 

Long-term investments
 
 
 
 
 
 
 
U.S. treasury securities
822

 

 
822

 

Corporate notes and bonds
18,539

 

 
18,539

 

Total long-term investments
19,361

 

 
19,361

 

Total fair value of financial assets
$
80,994

 
$
20,638

 
$
60,356

 
$



 
 
 
Energy Recovery, Inc. | Q1'2020 Form 10-Q | 15


ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
December 31, 2019
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Cash equivalents
 
 
 
 
 
 
 
Money market securities
$
86

 
$
86

 
$

 
$

U.S. treasury securities
11,582

 

 
11,582

 

Total cash equivalents
11,668

 
86

 
11,582

 

Short-term investments
 
 
 
 
 
 
 
U.S. treasury securities
2,747

 

 
2,747

 

Corporate notes and bonds
55,989

 

 
55,989

 

Total short-term investments
58,736

 

 
58,736

 

Long-term investments
 
 
 
 
 
 
 
Corporate notes and bonds
15,419

 

 
15,419

 

Total long-term investments
15,419

 

 
15,419

 

Total fair value of financial assets
$
85,823

 
$
86

 
$
85,737

 
$



During the three months ended March 31, 2020 and year ended December 31, 2019, the Company had no transfers of financial assets between any levels.

The following table presents a summary of the fair value and gross unrealized holding losses on the available-for-sale securities that have been in a continuous unrealized loss position, aggregated by type of investment instrument as of March 31, 2020 and December 31, 2019. The available-for-sale for investments that were in an unrealized gain position have been excluded from the table.
 
March 31, 2020
 
December 31, 2019
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
(In thousands)
U.S. treasury securities
$

 
$

 
$
2,027

 
$

Corporate notes and bonds
47,237

 
(364
)
 
18,754

 
(16
)
Total available-for-sale investments with unrealized loss positions
$
47,237

 
$
(364
)
 
$
20,781

 
$
(16
)


Note 6Goodwill and Intangible Assets

Goodwill

The net carrying amount of goodwill as of March 31, 2020 and December 31, 2019 was $12.8 million. As of March 31, 2020, the Company’s goodwill was not impaired.


 
 
 
Energy Recovery, Inc. | Q1'2020 Form 10-Q | 16


ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Other Intangible Assets

The following table presents identifiable intangible assets as of the date indicated, all of which are finite-lived. All intangible assets are amortized on a straight-line basis over their useful life.
 
March 31,
2020
 
December 31,
2019
 
(In thousands)
Finite-lived intangible assets
$
286

 
$
6,386

Accumulated amortization
(225
)
 
(6,321
)
Intangible assets, net
$
61

 
$
65



The reduction in the balance, from December 31, 2019 to March 31, 2020, of the gross other intangible assets and related accumulated amortization was due to the retirement of fully amortized patent assets.

Note 7Lines of Credit

Loan and Pledge Agreement

The Company entered into a loan and pledge agreement with a financial institution on January 27, 2017. Since inception, this loan and pledge agreement has been amended multiple times to accommodate the growth of the Company (the amended loan and pledge agreement is hereinafter referred to as the “Loan and Pledge Agreement”). The Loan and Pledge Agreement, as amended, which will expire on June 30, 2022, provides for a committed revolving credit line of $16.0 million and an uncommitted revolving credit line of $4.0 million. The covenants of the Loan and Pledge Agreement allow the Company to incur indebtedness owed to a foreign subsidiary in an aggregate amount not to exceed $66.0 million, which amount is subordinated to any amounts outstanding under the Loan and Pledge Agreement.

As of March 31, 2020 and December 31, 2019, there was no debt outstanding under the Loan and Pledge Agreement.

Stand-By Letters of Credit

Under the Loan and Pledge Agreement, the Company is allowed to issue stand-by letters of credit (“SBLCs”) up to one year past the expiration date of the Loan and Pledge Agreement and to hold SBLCs with other financial institutions up to $5.1 million. SBLCs have a term limit of three years, are secured by pledged U.S. investments, and do not have any cash collateral balance requirements. SBLCs are deducted from the total revolving credit line under the Loan and Pledge Agreement, and are subject to a non-refundable quarterly fee that is in an amount equal to 0.7% per annum of the face amount of the outstanding SBLCs.

As of March 31, 2020 and December 31, 2019, there were $11.6 million and $11.8 million, respectively, of outstanding SBLCs.

Note 8Commitments and Contingencies

Operating Lease Obligations

The Company leases office facilities and equipment under operating leases that expire on various dates through fiscal year 2030.

On January 10, 2019, the Company entered into an industrial lease agreement, which commenced on January 1, 2020. This new lease for a commercial development center for oil & gas field testing, manufacturing, and training, located in Katy, Texas (the “Katy Lease”), includes an office and warehouse space of approximately 25,200 square feet (“sqft.”) and land of approximately 4.5 acres. The Company’s annual base rent obligation, paid monthly, will be approximately $0.3 million with an increase of approximately 3% annually thereafter, totaling $3.6 million, over the term of the lease. The initial term of the Katy Lease is 120 months after the commencement date, and the Company has two options to extend the lease by an additional five-year term per option, which must be exercised by written notice at least six months prior to the end of the relevant term.

 
 
 
Energy Recovery, Inc. | Q1'2020 Form 10-Q | 17


ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


On February 10, 2020, the Company entered into a lease agreement, that commenced on March 1, 2020, for an additional office and warehouse space of approximately 54,429 sqft., located in Tracy, California (the “Tracy Lease”). The new lease will supplement the existing manufacturing, warehouse and distribution of the Company’s energy recovery devices (“ERDs”) and other products. The Company’s annual base rent obligation, paid monthly, is approximately $0.4 million, with an increase of approximately 3% annually thereafter, totaling $5.0 million, over the term of the lease. The initial term of the Tracy Lease is 122 months after the commencement date, and the Company has one option to extend the lease by an additional five-year term, which must be exercised by written notice at least nine months prior to the end of the original lease term.

The following table presents operating lease activities related to all leased properties.
 
Three Months Ended March 31,
 
2020
 
2019
 
(In thousands)
Operating lease expense
$
603

 
$
477

Cash payments
490

 
447

Non-cash lease liabilities arising from obtaining right-of-use assets
6,384

 



The following table presents other information related to outstanding operating leases as of March 31, 2020.
Weighted average remaining lease term
9.1 years
Weighted average discount rate
7.0%


The following table presents the minimum lease payments under noncancelable operating leases, exclusive of executory costs as of March 31, 2020.
 
Lease Amounts
 
(In thousands)
Year:
 
2020 (remaining nine months)
$
1,956

2021
2,468

2022
2,650

2023
2,580

2024
2,812

2025 and thereafter
13,198

Total
25,664

Less imputed lease interest
(6,932
)
Total lease liabilities
$
18,732



Warranty

The following table presents the changes in the Company’s accrued product warranty reserve.
 
Three Months Ended March 31,
 
2020
 
2019
 
(In thousands)
Warranty reserve balance, beginning of period
$
631

 
$
478

Warranty costs charged to cost of revenue
98

 
152

Utilization charges against reserve
(1
)
 
(12
)
Release of accrual related to expired warranties
(63
)
 
(47
)
Warranty reserve balance, end of period
$
665

 
$
571